Gas Natural Makes a 3rd Attempt to Buy a Spanish Rival DEALTALK

July 25, 2008

By Judy MacInnes

Is the third time the charm for Gas Natural?

The natural gas company, based in Barcelona, said in a regulatory filing Thursday that it was competing to buy a controlling stake in a rival utility, Union Fenosa, based in Madrid, its third attempt to acquire another Spanish energy company.

If successful, the move could lead to the creation of a domestic energy champion and head off would-be foreign acquirers. That is something likely to please the administration of the Socialist prime minister, Jose Luis Rodriguez Zapatero, who has supported such Spanish consolidation and has been chided by the European Commission for doing so.

Analysts have said that if Gas Natural were to purchase Fenosa that could be the precursor to an eventual three-way merger between Gas Natural, Fenosa and the utility Iberdrola, based in Bilbao, Spain.

But even before that, the Fenosa acquisition would make strategic sense for Gas Natural because it would provide a long-awaited opportunity for the company, a natural gas distributor, to move into electricity, analysts said.

Gas Natural said it was in talks to buy the 45.3 percent stake in Union Fenosa held by the Spanish construction company Actividades de Construccion y Servicios, or ACS.

Under Spanish law, any company that takes a stake of more than 30 percent in another company has to make a full bid.

The whole deal, worth about euro 13 billion, or $20.4 billion, would be backed by Gas Natural’s main shareholders – the savings bank La Caixa and the oil and gas group Repsol YPF, according to the newspaper Expansion, which cited unidentified people. GDF Suez also owns 11 percent of Gas Natural.

ACS said last week it had held talks to sell its controlling stake in Union Fenosa. The sale process is expected to begin this week, with two French companies, Electricite de France and GDF Suez, and an Italian utility, ENI, viewed as the likely bidders, aside from Gas Natural.

ACS has said it wants to use the proceeds to raise its 12 percent stake in Iberdrola, the world’s biggest wind energy company.

A bid by Gas Natural for Fenosa would be its third attempt to create a Spanish energy giant.

Gas Natural three years ago initiated a prolonged bidding war for Endesa, the Spanish utility. Gas Natural’s bid was eventually trumped by E.ON, of Germany, which ran into resistance among Spanish politicians who preferred to create a national champion. Endesa ultimately accepted a bid from Enel, of Italy, and Acciona, of Spain, which sold some assets to E.ON.

In 2003, Gas Natural had also attempted to strike a deal with Iberdrola that never came to fruition.

With the help of shareholders, Gas Natural could buy Union Fenosa without raising its debt to alarming levels, analysts at Fortis said.

Gas Natural shares fell 5.2 percent Thursday in Madrid, reflecting investors’ concerns about how the company would pay for the stake and how the deal would be financed. The ACS stake in Fenosa is worth about euro 5.9 billion at current market prices.

To comply with antitrust regulations, analysts said Gas Natural would likely have to sell Fenosa’s natural gas business to a Fenosa partner, ENI, and sell Fenosa’s renewable energy assets to another Fenosa partner, Enel.

Repsol YPF, which owns around 31 percent of Gas Natural, declined to comment, but the chairman, Antoni Brufau, has said on several occasions that he would back any deal Gas Natural initiated if it was good for its business.